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IN RE FREELAND

United States District Court, S.D. California


October 17, 2005.

In re CHARLES DOUGLAS FREELAND, Debtor. CHARLES DOUGLAS FREELAND, Appellant,
v.
APM PROFIT SHARING TRUST; PHILLIP G. LARSON, Trustee Appellees.

The opinion of the court was delivered by: JEFFREY MILLER, District Judge

ORDER VACATING ORDER GRANTING SUMMARY JUDGMENT AND REMANDING FOR FURTHER PROCEEDINGS
Appellant Freeland appeals the decision of the Bankruptcy Court denying Freeland's cross-motion for summary judgment which argued for dismissal on the grounds that Appellee APM Profit Sharing Trust ("APM") had not timely filed its Complaint to Determine Dischargeability of Certain Debt. Freeland also appeals the Bankruptcy Court's decision granting APM motion for summary judgment that precluded Freeland from from presenting evidence that a debt of $150,000 was not a debt arising from fraud.

Factual Background

  In September 1999, APM and Phillip Larson, trustee of APM, filed a complaint for breach of contract and fraud against Freeland. APM and Freeland settled these claims in a Confidential Settlement and Release Agreement the following February. Both parties had counsel during the settlement negotiations and the execution of the agreement. The settlement agreement provided for a stipulated judgment of $300,000, $150,000 of which was allocated to the breach of contract claim and $150,000 allocated to the fraud claim.

  Freeland filed for bankruptcy in February 2002. The case was converted from Chapter 11 to one under Chapter 7 in August 2002. At the time of conversion from Chapter 11 to Chapter 7, Freeland discovered that Larson was listed at the wrong address. Freeland amended his bankruptcy schedules to correct the address and served the amended notice of bankruptcy on Larson on October 9, 2002. On the schedule Larson was listed as a creditor with a claim for $200,000 based on a personal guaranty. The notice did not mention APM, nor did it indicate that Larson was the trustee for APM. Larson claims to have not received this notice and did not realize that APM was a creditor in a bankruptcy proceeding until December 2002. The deadline for filing a Complaint to Determine Dischargeability of Certain Debt under Section 523(a)(2) expired November 8, 2002. Larson filed his complaint on February 14, 2003.

  Adequacy of Notice

  Freeland moved to dismiss APM's Complaint to Determine Dischargeability of Certain Debt on the grounds that it was not timely filed pursuant to Federal Rule of Bankruptcy Procedure 4007. The Bankruptcy Court denied the motion, stating that the notice to Larson did not satisfy procedural due process. Freeland repeated his argument in a motion for summary judgment and was denied on the same grounds. This Court reviews the legal conclusions of the Bankruptcy Court de novo. See In re Kirsh, 973 F.2d 1454, 1456 (9th Cir. 1992).

  In In re Dewalt, the Ninth Circuit addressed the question of how much notice was sufficient before a creditor should be penalized for failure to act. 961 F.2d 848 (9th Cir. 1992). The court held that seven days notice of the bar date for a creditor to file a complaint was insufficient and the creditor could not be penalized for failing to file a complaint or a motion for an extension of time. The court reasoned:

[T]he 30-day notice provision of Rule 4007(c) provides a guide to the minimum time within which it is reasonable to expect a creditor to act at penalty of default. Even 30 days notice may not be enough if truly extraordinary circumstances are presented, as when an unsophisticated creditor, not represented by counsel, receives only the most sketchy notice that a bankruptcy has been filed. On the other hand, a somewhat lesser period may be sufficient where there is clear evidence the creditor has enough advance knowledge of the bar date to file the complaint or request an extension and has purposefully chosen to lie in wait rather than present its claim.
Id. at 851.

  Here, the Bankruptcy Court did not make specific factual findings as to why notice was inadequate, nor did the court cite legal authority for its conclusion that the notice did not satisfy procedural due process. It is suggested in the statement of facts of the court's decision on the cross-motions for summary judgment that the failure to indicate that Larson is a creditor in his capacity as trustee of APM as well as the fact that Larson's claim was listed as a "personal guaranty," render the notice so vague as to be inadequate.

  Freeland argues that any flaws in the actual notice are not enough to render the notice flawed constitutionally. He argues that under In re Gregory, the burden shifts to the creditor once the creditor receives even vague notice that he is a creditor in bankruptcy. See In re Gregory, 705 F.2d 1118 (9th Cir. 1983). In Gregory, the court declared that "[w]hen the holder of a large, unsecured claim . . . receives any notice from the bankruptcy court that its debtor has initiated bankruptcy proceedings, it is under constructive or inquiry notice that its claim may be affected, and it ignores the proceedings to which the notice refers at its peril." Id. at 1123; see also In re Bucknum, 951 F.2d 204, 209 (9th Cir. 1991) (O'Scannlain, J. concurring) (quoting Neeley v. Murchison, 815 F.2d 345, 347 (5th Cir. 1987) as stating "[section] 523(c) of the Code, which Rule 4007 is designed to implement, places a heavy burden on the creditor to protect his rights: a debt of the type presented here is automatically discharged unless the creditor requests a determination of dischargeability [in a timely fashion]."). However, a debt is not subject to automatic discharge if the debtor fails to schedule the creditor and if the creditor had no notice or actual knowledge of the proceeding in time to file a complaint or motion for extension. 11 U.S.C. ยง 523(a)(3)(B).

  The record from the Bankruptcy Court does not indicate whether the court meant to deny Freeland's motion to dismiss under Section 523(a)(3)(B). Although the court suggests that the failure to list APM on the schedule contributes to the inadequacy of the notice, the court did not make any findings with respect to whether APM had notice or actual knowledge. APM has contended that Larson never received notice of the bankruptcy and only realized that there were pending proceedings after speaking with another creditor in December 2002.

  Because this Court cannot determine the facts on which the Bankruptcy Court relied in concluding that there was a lack of procedural due process, this matter is remanded for further factual development.

  Collateral Estoppel

  Provisionally, the Court also notes that Freeland's argument that the Bankruptcy Court improperly applied collateral estoppel under Archer v. Warner, 538 U.S. 314 (2003), is not persuasive. The settlement agreement clearly apportions $150,000 of the settlement amount to the fraud claim. In this respect this case is distinguishable from Archer. See Archer, 538 U.S. at 322 ("[W]hat has not been established here . . . is that the parties meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankrutcy."). The Court infers from this apportionment that the parties intended to resolve the fraud claim. The Bankruptcy Court, therefore, properly applied collateral estoppel. See California State Automobile Assoc. Inter-Insurance Bureau v. Superior Court, 50 Cal.3d 658, 664 (1990) ("A stipulated judgment may properly be given collateral estoppel effect, at least when the parties manifest an intent to be collaterally bound by its terms.").

  The Court hereby VACATES the order of the Bankruptcy Court granting summary judgment for APM and REMANDS the case for factual findings on the adequacy of notice.*fn1

  IT IS SO ORDERED.

20051017

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